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  1. #1
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    Sep 2016
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    Default Capital Gains Taxes on Fire Damaged Inherited Property

    A family in California inherited a home after a fire in which the owner was killed and the home badly damaged. A developer has offered to buy the property for $250,000. The home and land, if not burned, would probably sell for $500K or more.

    The developer's price seems low, but he's telling the family that if they ask for more than that they'll owe capital gains tax on the property. Is that correct?

  2. #2
    Join Date
    Sep 2005
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    Default Re: Capital Gains Taxes on Fire Damaged Inherited Property

    The family received a step up in basis at the time they inherited the home. That is, their tax basis is the home's market value. If the market value of the home is greater than the developer's offer, they would be taking a capital loss when selling the home for that below-market offer.

    Also, even if capital gains taxes were an issue, they would be less than the additional profit that the family would make on a sale at a higher price. That is, capital gains tax avoidance is not a valid reason to avoid finding a buyer who will pay the highest possible price.

    The developer who is making the offer appears to be trying to mislead them into accepting a low offer. They should look for other buyers and sell to the highest bidder.

    If the home was insured, the family may benefit from having the home repaired and then selling it, or using the insurance proceeds to raze the home and build a new, modern home.

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